HM Revenue & Customs (HMRC) is preparing to collect £1.3 billion from the self-employed by changing how they pay tax, following Chancellor John Healey's Budget. The move, announced on Wednesday, will require self-employed workers to pay tax regularly throughout the year instead of in two instalments.
The Treasury expects to raise £1.3 billion from the change when it is introduced in 2029-30, and £1.8 billion two years later. The reform aims to bring the self-employed more in line with employees, who pay tax monthly.
Who is affected
About 12 million people complete a Self Assessment tax return each year, including the self-employed. Around three million of that total currently have to make payments twice a year towards their next tax bill, known as Payments on Account.
HMRC said that under the current rules, there can be a "significant gap" between earnings and the tax due on them. The tax collector said delays can make it harder for people to budget and pay larger bills, increasing the risk of late payments and tax debt, which can lead to penalties. It also costs HMRC to go after unpaid tax.
How payments will change
Currently, taxpayers make two Payments on Account per year, in January and July. If these do not cover the full tax bill, a final payment is due by January 31, at the end of the tax year. But HMRC can fail to collect the money it is owed straightaway when taxpayers have already spent it, or lose out completely when a company goes bust.
HMRC confirmed on Wednesday that those who make Payments on Account will make smaller and more regular payments from April 2029. It has yet to confirm how often the automated payments will need to be made, with plans to work out a schedule and share more details "in the future". Taxpayers will be allowed to pay by PAYE if they prefer.
Impact and concerns
The total Mr Healey expects to raise from this measure exceeds the £1.5 billion he anticipates raising from his temporary rise to the bank Corporation Tax surcharge. Measures to close the tax gap are the Budget's biggest tax revenue raiser, according to the FT.
The tax gap is the difference between the total amount of tax that, in theory, should be collected by HMRC and the amount that is actually paid. It is estimated to be £59.2 billion for the 2024-25 tax year, representing 6.4% of total theoretical tax liabilities. Almost two-thirds of the amount was linked to small businesses.
Chris Sanger, UK tax policy lead at EY, told the FT the Chancellor's changes would be problematic to operate, given profits for some businesses are seasonal and fluctuate over the year.
